22 November 2023
The 2024 tax law changes has been approved by the Hungarian Parliament. The ’tax package’ contains a number of amendments that affect personal income taxation, social security contributions and social tax rules. We summarized the most important changes below.
Personal income tax
Since the USA-Hungary Double Tax Treaty (’US-HU DTT’) will not be applicable as of 1 January 2024, many sections of the Act on Personal Income Tax (’PIT Act’) will be amended.
The rules on crediting personal income tax paid abroad is significantly modified, taking into account the interests of the Hungarian State Budget. The tax paid abroad can only be credited against the Hungarian personal income tax if the income is sourced from abroad (i.e. the place of earning is abroad). The sourcing, and thus the place of earning, must be established based on the relevant rules of the PIT Act. Previously, there was no such a prelimary condition for foreign tax crediting. The change was primarily implied by the termination of the US-HU DTT, but it is applicable to all cases where Hungary does not have a double tax treaty. This change affects the taxation of income both from activities and capital. In some cases, the amended rule may cause double taxation, i.e. posing a tax disadvantage for private individuals.
The tax regulation concerning artists and sportsmen performing in Hungary will be amended. Based on the modified regulation, their income will be taxable in Hungary even if the income is not paid directly to the individual, but to another person (e.g. any foreign company, including their personal company) in consideration of the individuals’ activities. Consequently, in the absence of the US-HU DTT as of 2024, the same tax situation continues based on the domestic rules as were previously been dictated by the US-HU DTT.
Another amendment implied by the termination of the US-HU DTT is the change in the taxation of interest paid by a company seated in a non-treaty country. Currently, this income is taxable as ’other income’ instead of interest income, however, as a result of the change, if the non-treaty country is otherwise an OECD member state, then the income obtained will actually be taxable as interest income.
A similar change will take place with regard to controlled capital market transactions. If the income derives from a transaction carried out through an investment service provider operating in an OECD member state (even if Hungary does not have a double tax treaty with the given country), the income will be considered as originating from a controlled capital market transaction (of course, subject to compliance with additional conditions, e.g. the provider operates under local capital market supervision and there is exchange of information with the country’s supervisory authority).
As of 2024, the PIT Act will be expanded with a new tax-free solution, practically, with a new securities acquisition program. Pursuant to this, securities (shares, Ltd. participations) acquired free of charge or at a discount by employees and senior executives in start-up companies are exempt from tax. There are several conditions for the tax exemption. One of the conditions is that the participant does not sell the securities obtained in this way within 3 years of the securities being acquired. A special rule applies to securities acquired through exercising a stock option (or other similar right). For securities acquired in this way, the 3-year sales time limit must be calculated from the vesting date of the stock option. Pursuant to the new regulation, those companies are regarded as start-ups which are micro and small enterprises that was registered for no more than five years ago, is not listed on a stock exchange, was not established by a merger or a split-off, and has not yet paid dividends from its retained earnings.
The new rules contain several simplifications regarding the benefits provided by disbursers. The frequency of assessing, reporting and paying the related tax is to be changed from monthly to quarterly. Another relief is that the tax point of the income deriving from a service provided by a disburser directly will be the date when the accounting record (issued by the disburser) is available. Currently, the date of income realization is the date of the VAT tax point which could be an earlier date than the availability of the accounting record.
The rule based on which low value gifts can be provided three times a year as a defined specific benefit will also return. The value limit of the tax advantageous one time gift remains the same (10% of the minimum wage). The above changes make the tax administration of companies providing fringe benefits easier.
Prizes from lottery-like games covered by the Act on Gambling will become tax free. For this reason, among others, lottery and keno prizes would be tax free according to the modifications.
Social security contributions
The contribution base of third-country national private individuals whose income becomes taxable abroad will be amended. This typically occurs in cases where such citizens are assigned from Hungary to a foreign country to perform work. Under the new rule, all income paid to such persons will be part of the contribution base. (Previously, the contribution base for this group of personnel was the base salary, but at least the average national monthly gross salary prevailing in July of the previous year as reported by the Hungarian Central Statistical Office.) This can significantly increase the employment cost of Hungarian companies assigning third-country national employees abroad, since, in addition to the higher contribution base, the social tax base of the company will be increased accordingly.
Social tax
Individuals considered as non-Hungarian residents for social security purposes (typically citizens of non-Hungarian and non-EU countries) do not currently have a social tax obligation in cases where an income does not form part of the contribution base (e.g. income from a legal relationship not triggering insurance liability). However, the amended rule clarifies that if income is being paid retroactively (e.g. bonus, reward) for Hungarian activities (spent originally under Hungarian insurance), there is an obligation to pay social tax, i.e. in this case the general exemption rule cannot be applied.
The personal scope of the social tax credit with respect to employees entering the labor market is modified. As of 2024, in addition to employees with Hungarian citizenship, the allowance can be applied regarding employees with Ukrainian and Serbian citizenships.
Pursuant to an amendment to the Act on Simplified Employment, the lump-sum tax would be classified as social tax in the future. However, social tax credits will not be available for these obligations.
In addition to the above, it is likely that significant changes will be introduced regarding the taxation of the private entrepreneurs from 2025, however, the relevant amendments were not included in the tax law amendment proposal. According to the reasoning, the previous proposal requires further consultations, as such, they are canceled for the time being.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Roland Szabó
Director
roland.szabo@vialto.com
Dénes Megyesi
Director
denes.megyesi@vialto.com
Mónika Keztyűs
Senior Manager
monika.keztyus@vialto.com
Csilla Schneider
Senior Manager
csilla.schneider@vialto.com
Andrea Cziegle-Gérecz
Manager
andrea.gerecz@vialto.com